GM's move to offer more than $7,000 in incentives on its 2014 Silverado has made investors nervous about a possible incentive war.

When General Motors announced it would offer more than $7,000 in discounts on some of its big Silverado pickups the news sent many shoppers rushing to showrooms – but it also sent shivers racing down the spines of automotive investors increasingly worried that slowing sales may trigger the sort of incentive wars that trashed industry profits during the years leading up to the recent recession.

All the ingredients are there for a classic price war, automotive analysts warn. January auto sales took a sharp dip that may have been impacted by more than just the cold weather gripping the nation. In turn, there are now a growing number of vehicles piling up on dealer lots across the country, a situation that may force manufacturers to sharply increase current rebates and other incentives.

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“Rising inventory levels combined with several more waves of bad weather will result in a short-term spike in incentives,” said Eric Lyman, vice president of Editorial and Consulting for ALG, formerly known as the Automotive Leasing Guide. “The danger is that this could be the beginning of an escalating arms race for market share.”

According to ALG data, the number of days it takes to sell a vehicle after it rolls onto the typical U.S. dealer’s lot has been increasing in recent months. It’s now up to 59 days – more than the average 51 “days to turn” in January 2010, though down from 68 in August 2009 as the U.S. auto industry plunged into its worst recession in decades.

That has triggered a modest, though noticeable trend upwards in givebacks over the last few weeks, according to trackers. That’s a sharp turnaround for an industry that had been trying to wean itself off of the costly givebacks that had cost manufacturers billions of dollars in lost profits during the recent economic downturn.

Last year’s surge in demand – U.S. new vehicle sales rising more than 1 million units to 15.6 million for all of 2013 – had permitted makers to not only trim incentives but demand more for their products, average transaction prices reaching record levels during the latter half of the year.

But the average price paid after working in both incentives and options dipped sharply in January, at $29,882 down 3% from just the month before. And while incentives were actually down in January, some analysts said makers might have gotten too stingy, helping drive down sales already hurt by cold weather.

While it’s still too early to tell what February will bring, ALG is forecasting a “short-term spike,” with incentives likely to climb as much as 15% to 20% longer-term. And that’s assuming that makers don’t decide to ramp givebacks up even more in a bid to boost market share, as well as sales. That’s the sort of approach that triggered devastatingly costly incentive wars in the past.

There is, warns editor Karl Brauer, of Kelley Blue Book, “the very real possibility of an incentives war if sales don’t pick up in the coming weeks.”

Which is why investors reacted in panic when it was initially reported GM was going to offer that $7,000 discount across its vast truck line-up. The maker took a 3.4% hit to its stock price before it made it clear the givebacks were limited to only about 10% of its Chevrolet Silverado and GMC Sierra full-size pickups.

In fact, new CEO Mary Barra had promised, during a meeting with reporters on Feb. 6, that, “we will still maintain our pricing discipline” despite January’s poor sales.

(Click Here for the details on Toyota’s recall of 1.9 million Prius hybrids.)

Detroit makers, in particular, have repeatedly said they will break with past practices of running factories flat out and then use incentives to build demand. In fact, Ford has cut production on several models in recent weeks – though some of those cutbacks have been the result of weather-related parts shortages.

The real test will come in February and March as automakers waits to see if sales recover. A further slowdown in demand could see industry planners panic and roll out more aggressive givebacks that could, in turn, force competitors to respond, triggering an all-out incentive war.

That might be good news for consumers but for an industry still recovering from its worst downturn in decades, it would be a severe blow.

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One Response to “As Sales Slow, Automakers Could be Heading for Incentives War”

The Big Three did not learn from their past mistakes and they are right back to over producing product. There should Never be another car company bailout based on the abuse and exploitation of U.S. tax payers who got fleeced by GM and Fiat.